Federal Reserve shouldn't be chained with a congressional formula for interest rates

Business leaders face considerable uncertainty in today’s world, much of it caused by the government. So it is understandable that some in Congress would want to impose a bit of certainty on the Federal Reserve. But their proposal isn't a good idea.

Business leaders face considerable uncertainty in today’s world, much of it caused by the U.S. government. So it is understandable that some in Congress would want to impose a bit of certainty on the Federal Reserve, the agency with the most immediate control over the economy.

But a bill in the House aimed at doing this would likely just make things worse.

On the subject of business uncertainty, consider two mammoth pieces of legislation that have sprung up since the Great Recession:

The Dodd–Frank Wall Street Reform and Consumer Protection Act, passed in 2010 as a response to the bailouts necessitated by the recession, creates a mountain of regulations that are confusing and convoluted. Among other things, it requires regulators to write nearly 250 new rules, and many of those remain forthcoming.

Additionally, the Affordable Care Act injects enormous uncertainties into business planning. Some companies have reacted by reducing full-time employees in favor of part-timers who don’t qualify for health benefits. Others have trouble making long-term decisions as the administration changes deadlines written into the law, or as aspects of the law are challenged in court.

The text of each of these laws is enormous. Dodd-Frank runs 849 pages, while the ACA is 906 pages. As Nicole Gelinas wrote last year in the Los Angeles Times, this compares with 93 pages in the Securities Act of 1933. As uncertain as business conditions were during the Great Depression, Washington apparently was run by comparative regulatory amateurs back then.

But in addition to these laws, the Federal Reserve has been pumping money into the economy in the form of mortgage securities and treasury bonds, and keeping interest rates low, drawing criticisms from some economists who worry about possible inflation or weak investment incentives.

Republicans in Congress have proposed a bill that would require the Fed to write a formula for how it sets short-term interest rates, which have a direct impact on lending rates nationwide. John Taylor, an economics professor at Stanford, provides an example of such a formula using data from several economic indicators.

The idea is that businesses would then have a reliable way to predict interest rates, giving them greater investment confidence.

Federal Reserve Chairwoman Janet Yellen strongly opposes the idea, arguing that the Federal Reserve should remain independent from political pressures and nimble enough to react to events.

While it is tempting to establish rules that bring certainty to interest rates, Yellen holds the upper hand in this debate. A formula for setting interest rates would be only as good as the person, or people, who create it.

Certainly, the same can be said about members of the Federal Reserve Board that currently makes those decisions. However, their record during the tumultuous upheavals in 2008, despite controversies, is good. The Troubled Asset Relief Program, signed into law by President George W. Bush, stemmed panic among financial institutions and prevented more widespread damage to the economy.